Consulting Editon ‘Accounting; — 24th’ Edition Cia NC ee Since-1996) ‘Compliant with\the|Latest! Framework and}IFRS. Updated! GB nari s ciryae rca nl creaTeyaey (clearsDiscussions tProventEffectives| facebook. conus i i WIN’ ‘Ballada, CPA, CBE, MBA Top 2, CPA Board Author sustafetllada, CPA = 2 Consulting Editor ‘ ‘Enhanced Basic Accounting bee af 2022]Issue Lf 24th Edition \ NW im 44, Wh, From Your|Trusted’ ‘Aathior Sinée/1996. * Contptiant with the Uatest'Conceptual: Framework and IFRS. “Updated ariel ee. ae eae we Ber (Act. ivTABLE OF CONTENTS Basic Financial Accounting and Reporting (Enhanced Basic Accounting) 2022 Issue ~ 24th Edition by Prof. WIN Ballada, CPA, CBE, MBA Part One INTRODUCTION 1 Accounting and Its Environment Learning Objectives bie Real World Situation ce Introduction 72 Definitions of Accounting o Evolution of Accounting i Primitive Accounting Use of Bullae Code of Hammurabi Scribe Clay Tablets Middle Ages Use of Arabic Numerals, Quipu The Florentine Approach Giovanno Farolfi & Company Amatino Manucci ‘The Method of Venice Luca Pacioli Savary and Napoleonic Commercial Code Napoléon Bonaparte, Jacques Savary Nicolas Petri, Benjamin Workman Industrial Revolution Corporate Organization Railroads United States Steel ‘Schmalenbach and The Model Chart of Accounts Imposition of Income Tax and Conflicts with Financial Accounting Information Age ASEAN 1-10 Establishment and Member States Vision Opportunities Four Pillars of ASEAN Economic Community[ASEAN Framework Agreement on Services Mutual Recognition Agreements and ASEAN Chartered Professional ‘Accountant [ASEAN Qualification Reference Framework Fundamental Business Model Types of Business Forms of Business Organizations Sole Proprietorship Partnership Corporation Micro, Small and Medium Enterprises Republic Act No. 9501, Definitions of MSMEs Activities in Business Organizations Financing Activities Investing Activities Efficient versus Effective Operating Activities Purpose and Phases of Accounting Pacioli’s Double-Entry Bookkeeping and Its Evolution Three Essential Things Three Books in the Summa Three Basic Questions of Owners Fundamental Concepts Entity Concept Periodicity Concept ‘stable Monetary Unit Concept Going Concern Criteria for General Acceptance of an Account GAAP Relevance Objectivity Feasibility Basic Principles Objectivity Principle Historical Cost Revenue Recognition Principle Expense Recognition Principle Adequate Disclosure Materiality Consistency Principle—per revised PAS No. 1 Taxation of Business Organizations (per TRAIN Law and Create Act) Sole Proprietorship Partnership Corporation Accountancy in the Philippines g Principle xvi 112 1:13 1.15 1.15 1-16 1.47 1-18 1-19 1-20 1-20 1-21 1-25Prominent Certified Public Accountants Developments Accountancy Act of 2004 127 ‘Scope of Practice Practice of Public Accountancy Practice in Commerce and Industry Practice in Education/Academe Practice in Government The Professional Regulatory Board of Accountancy & Its Composition Qualifications of Members of the Professional Regulatory Board The Certified Public Accountant Examinations Qualifications of Applicants for Examinations Scope of Examination Rating in the Licensure Examination Report of Ratings Failing Candidates to Take Refresher Course Professional Organization 1:30 ine Institute of Certified Public Accountants Changes Due to Amended By-Laws, dated Nov. 26, 2005 Accounting Standards in the Philippines 131 Financial Reporting Standards Council Core Competencies Framework for Accountants 1-32 Knowledge Skills Values Role of Ethics in Business 1:35 Definition of Ethics Ethical Dilemma Ethical Reasoning Sleep-Test Ethics fations—White-Collar Crime, Whistle-Blowing, Conflicts of Interest, luciary Responsibilities, Sexual Harassment, Discrimination Ethical Financial Reporting Sarbanes-Oxley Act Code of Corporate Governance Code of Ethics for Professional Accountants in the Philippines 1:39 International Federation of Accountants Introduction to the Code Fundamental Principles Integrity Objectivity Professional Competence and Due Care Confidentiality Professional Behavior sitThe Accountancy Profession Characteristics Career Opportunities Public Practice Commerce and Industry Government Service Education/Academe Branches of Accounting Auditing Bookkeeping Cost Bookkeeping, Costing and Cost Accounting, Financial Accounting Financial Management Management Accounting Taxation Government Accounting Academicians, Students and Educators Alliance (ASEAN Party List) Philippine Association of Collegiate Schools of Business Philippine Council of Deans and Educators in Business Discussion Questions = Exercises Accounting Equation and the Double-Entry System Learning Objectives Real World Situation Parts of an Information System ‘Accounting Information System Cost-Benefit Principle Control Principle Compatibility Principle Flexibility Principle Types of Accounting Information Systems Manual System Computer-Based Transaction Systems Database Systems Stages of Data Processing Elements of Financial Statements (per 2018 Conceptual Framework) Financial Position Assets: Uabilties Equity Financial Performance—Income and Expenses xviii 1-42 144 1.47 1-48 1-49 1-50 1-51 21 21 22 24 2-6 26The Account 29 The Accounting Equation 2-10 Debits and Credits--The Double Entry System 211 Balance Sheet Accounts Income Statement Accounts ‘Normal Balance of an Account 2-42 Accounting Events and Transactions 212 Types and Effects of Transactions 2-12 Source of Assets . Exchange of Assets Use of Assets Exchange of Claims Typical Account Titles Used 2:13 ‘Statement of Financial Position Assets—Current and Non-current Liabilities—Current and Non-current Owner's Equity Income Statement Income Expenses Accounting for Business Transactions 247 Financial Transaction Worksheet 7 Use of T-Accounts Distinction Between Revenue and Receipts 2.27 Discussion Questions 2:28 Exercises 2:29 Part Two ACCOUNTING FOR A SERVICE BUSINESS 3 Recording Business Transactions Learning Objectives 7 34 Real World Situation 32 Transaction Analysis (Step 1) 32 Source Documents 3.2 Accounting Cycle: Sequential Steps and Aims 33 The Journal 35 Format Simple and.Compound Entry 36 Transactions are Journalized (Step 2) Initial Investment (Source of Assets) Rent Paid in Advance (Exchange of Assets) Note Issued for Cash (Source of Assets) Service Vehicle Acquired for Cash (Exchange of Assets) Insurance Premiums Paid (Exchange of Assets) xixOffice Equipment Acquired on Account (Exchange and Source of Assets) ‘Supplies Purchased on Account (Source of Assets) ‘Accounts Payable Partially Settled (Use of Assets) Revenues Earned and Cash Collected (Source of Assets) Salaries Paid (Use of Assets) Unearned Revenues Collected (Source of Assets) Revenues Earned on Account (Source of Assets) ‘Withdrawal of Cash by Owner (Use of Assets) Expenses Incurred but Unpaid (Exchange of Claims) Accounts Receivable Partially Collected (Exchange of Assets) Expenses Incurred and Paid (Use of Assets) The Ledger Permanent Accounts Temporary Accounts: Chart of Accounts Posting (Step 3) Ledger Accounts After Posting Trial Balance (Step 4) Locating Errors Discussion Questions Exercises Adjusting the Accounts Learning Objectives Accrual Basis Periodicity Concept Recognition and Derecognition Revenue from Contracts with Customers (PFRS 15) ‘The Need for Adjustments Deferrals and Accruals Adjustments for Deferrals (Step 5) Allocating Assets to Expenses Prepaid Expenses Depreciation of Property and Equipment Allocating Revenues Received in Advance to Revenues Adjustments for Accruals (Step 5) ‘Accrued Expenses Accrued Revenues Accrual for Uncollectible Accounts Effects of Omitting Adjustments Analysis Using T-Accounts Summary of Adjusting Entries 3-13 3-14 3-14 3-15 3-17 3-18 3-20 3-21 44 44 42 43 44 45 46 47 4-12 4-15 4-16 4-17 4-19‘Appendix—Alternative Methods of Recording Deferrals Prepaid Expenses Unearned Revenues Discussion Questions Exercises Worksheet and Financial Statements Learning Objectives The Worksheet Preparing the Worksheet (Step 5) Essence of Financial Statements Complete Set of Financial Statements (per revised PAS No. 1) Preparing the Financial Statements (Step 6) Statement of Comprehensive Income Statement of Changes in Equity ‘Statement of Financial Position Liquiity Financial Flexibility Solvency Format Classification Statement of Cash Flows (per PAS No. 7) Cash Flows from Operating Activities: Direct and Indirect Method Cash Flows from Investing Activities ‘Cash Flows from Financing Activities Relationships Among the Financial Statements Discussion Questions Exercises Completing the Accounting Cycle Learning Objectives Adjustments are Journalized and Posted (Step 7) Closing Entries are Journalized and Posted (Step 8) Preparation of a Post-Closing Trial Balance (Step 9) Reversing Entries (Step 10) Discussion Questions Exercises 4-20 4-23 4-24 5-15 5-16 5-17 61 61 6-2 6-4 65 67 6-8Part Three ACCOUNTING FOR A MERCHANDISING BUSINESS. 7 Merchandising Operations Learning Objectives 7 Real World Situation 7A Comparison of Income Statements 72 74 Operating Cycle of a Merchandising Business Source Documents: with Specimen of Sales Invoice, Statement of 74 Account, Official Receipt, Peso Deposit Slip, Check, Purchase Order Steps in a Purchase Transaction Terms of Transactions Cash Discounts—Purchases and Sales Discounts Trade Discounts Transportation Costs FOB Shipping Point FOB Destination Freight Prepaid or Freight Collect Inventory Systems Perpetual Inventory System Periodic Inventory System Net Sales Gross Sales Sales Discounts Sales Returns and Allowances Transportation Out FOB Destination, Freight Prepaid FOB Shipping Point, Freight Collect FOB Destination, Freight Collect FOB Shipping Point, Freight Prepaid Cost of Sales Merchandise Inventory Net Cost of Purchases Purchases Purchases Returns and Allowances Purchases Discounts Transportation In FOB Destination, Freight Prepaid FOB Shipping Point, Freight Collect FOB Destination, Freight Collect FOB Shipping Point, Freight Prepaid Value-Added Tax Entries Operating Expenses Appendix—Periodic and Perpetual Inventory Systems Compared Discussion Questions Exercises 75 7-12 7-13 7-16 721 7-22 7-23 7-25 7-26Completing the Cycle for a Merchandising Business Learning Objectives Need for a Physical Count Merchandise Inventory at the End of the Ps ‘The Adjusting Entry Method The Closing Entry Method Preparing the Worksheet Preparing the Financial Statements (per revised PAS No. 1) income Statement Nature of Expense Method Function of Expense Method ‘Statement of Changes in Equity Balance Sheet Adjusting and Closing Entries Post-Closing Trial Balance Appendix—Worksheet in a Perpetual Inventory System Discussion Questions Exercises Special and Combination Journals, and Voucher System Learning Objectives Control Accounts and Subsidiary Ledgers Special Journals ‘Advantages of Using Special Journals Sales Journals Cash Receipts Journal Purchases Journal Cash Disbursements Journal General Journal Proving the Ledgers Flexibility of Special-Purpose Journals Voucher System Voucher Voucher Register Unpaid Voucher File ‘Check Register Paid Voucher File Special Problems in a Voucher System Gross or Net Amounts Recording Purchases Returns and Allowances Recording Partial Payments Combination Journal Discussion Questions Exercises vit a4 B41 82 84 as 8-10 8-11 8-12 8-12 8-13 91 93 95 99 9-10 9-13 9-13 9-13 9-14 9-17 9-18 9-19 9-20Part Four OTHER TOPICS 10 11 Manufacturing Operations Learning Objectives Real World Situation Comparing Merchandising and Manufacturing Activities Elements of Manufacturing Costs Direct Materials Direct Labor Manufacturing Overhead Manufacturing Inventory Accounts Finished Goods Inventory Work in Process Inventory Raw Materials Inventory Factory Supplies Inventory Accounting for Manufacturing Activities Cost System Non-Cost System Pro-Forma Journal Entries Manufacturing Summary Statement of Cost of Goods Manufactured Statement of Cost of Goods Sold Worksheet for a Manufacturing Company Exercises Payroll Learning Objectives Accounting for Payroll Definition of Terms Gross Pay Employee Benefits Employees’ Payroll Deductions and Employer's Payroll Expenses Net Pay The Payroll System Payroll Entries Remittances Internal Control over Payrolls Sample Payroll Register $55 and EC Contributions Schedule for Employed Members Revised Semi-Monthly Withholding Tax Table vaxiv 101 10-1 10-2 10-3 10-3 10-4 10-7 10-8 10-8 10-9 14-1 1-113 12 s: Basic Considerations and Formation Learning Objectives Real World Situation Definition Characteristics of a Partnership Mutual Contribution Division of Profits or Losses Co-Ownership of Contributed Assets Mutual Agency Limited Life Unlimited Liability income Taxes Partners’ Equity Accounts Advantages and Disadvantages of a Partnership Partnership Distinguished from Corporation Manner of Creation Number of Persons Commencement of Juridical Personality Management Extent of Liability Right of Succession Terms of Existence Classifications of Partnerships Kinds of Partners Articles of Partnership SEC Registration Accreditation to Practice Public Accountancy Accounting for Partnerships Owners’ Equity Accounts Partner’s Capital Account Partner’s Drawing Account Loans Receivable From or Payable to Partner. Partnership Formation Valuation of Investments by Partners Adjustment of Accounts Prior to Formation Opening Entries of a Partnership Upon Formation Individuals with No Existing Business Form a Partnership. ASole Proprietor and Another Individual Form a Partnership ‘Two or More Sole Proprietors Form a Partnership Review Questions Exercises Partnerships: Operations and Financial Reporting Learning Objectives Partners’ Equity in Assets Contrasted with Share in Profits or Losses vv 12-1 124 12.3 12:3 12-4 125 125 12-6 12-7 12-7 12-8 12-9 12-11 12-22 12-23 13-1 13-114 Factors to Consider in Arriving at a Plan for Dividing Profits or 13-2 Losses ‘Money, Property or Industry Performance Methods Rules for the Distribution of Profits or Losses 13-3 Correction of Prior Period Errors 13-4 13-5 rribution of Profits or Losses Based on Partners’ Agreement Equally or in Other Agreed Ratio Based on Partners’ Capital Contributions Ratio of Original Capital Investments Ratio of Capital Balances at the Beginning of the Year Ratio of Capital Balances at the End of the Year Ratio of Average Capital Balances By Allowing Interest on Capital ‘Comparison of Distribution—Capital Ratios and Interest on Capital By Allowing Salaries to Partners By Allowing Bonus to the Managing Partner Before Bonus After Bonus By Allowing Salaries, Interest on Capital, and Bonus to'Partners ‘After Salaries, Interest but Before Bonus After Salaries, Interest and After Bonus Financial Reporting 13-15 Purpose of Financial Statements Overall Considerations per IAS No. 1 (revised 2007) Fair Presentation and Compliance with IFRS Going Concern Accrual Basis of Accounting Materiality and Aggregation Offsetting Frequency of Reporting and Comparative Information Consistency of Presentation Identification of Financial Statements Complete Set of Financial Statements per IAS No. 1 (revised 2007) Statement of Comprehensive Income Statement of Changes in Partners’ Equity Statement of Financial Position Statement of Cash Flows per IAS No. 7 Review Questions 13-21 Exercises 13-22 Corporations: Basic Considerations (per Revised Corporation Code) Learning Objectives 14-1 Real World Situations—Pareto Principle, ASEAN SMEs, GMC 14-1 Revised Corporation Code 142 Definition 14-3 Attributes of a Corporation 14-3 14-4 ‘Advantages of a Corporation vxvi niall15 Disadvantages of a Corporation Classes of Corporations—Stock and Non-Stock Other Classifications of Corporations Components of a Corporation Corporators, Incorporators Shareholders, Members Subscribers, Promoters, Underwriters Independent Director, Corporations Vested with Public Interest Additional General Powers Classes of Shares in General Articles of Incorporation Contents Prescribed Form Comparison of AOI per RCCP and Corporation Code Registration, Incorporation and Commencement of Corporate Existence Non-Use of Corporate Charter and Continuous Inoperation By-Laws No Minimum Capital Stock Basic Corporate Organizational Structure ights of a Shareholder Corporate Books and Records One Person Corporation Review Questions Exercises Corporations: Share Capital, Retained Earnings and Financial Reporting Learning Objectives Overview of Shareholders’ Equity Share Capital Legal Capital Share Premium Two Basic Types of Shares Ordinary Share Preference Share Terms Related to Share Capital ‘Authorized Share Capital Issued Share Capital Subscribed Share Capital Outstanding Share Capital Treasury Stock Accounting for Issuance of Share Capital With Par Value Without Par Value 14-4 14-4 14-5 146 14-8 14-9 14-10 14-12 14-13 14-13 14-14 14-15 14-15 14-16 14-17 14-18 14-19 14-20 15-1 15-1 15-2 15-3 15-3 15-4Considerations for Issuance of Shares 15.4 Share Issue Costs (per IAS No. 32), Listing (per PIC) and Joints Costs Share Issuances for Cash 15-5 With Par Value Issuing Share Capital at Par issuing Share Capital Above Par Without Par Value Issuing No-Par Share Capital issuing No-Par Share Capital with Stated Value Subscription of Shares 15-7 Regular Subscriptions Delinquent Subscriptions Treasury Stocks per IAS No. 32 15-9 Purchase Re-issuance Retirement Summary of the Effects on Assets, Liabili i 15-12 Overview of Retained Earnings 15-12 idends in General 15-13 Date of Declaration Date of Record Date of Payment Cash Dividends 15-14 Share Dividends 15-15 Small Share Dividends Large Share Dividends Summary of the Effects of Divi 15-18 Statement of Retained Earnings 15-18 Statement of Changes in Shareholders’ Equity 15-19 Review Questions 15-21 15-22 Exercises Adjunct Material-- Practice Set roviiiBasic Financial Accounting & Reporting Accounting and Its Environment Learning Objectives After studying this chapter, you should be able to: 1. Define accounting and explain its role in business. 2. Have a fair knowledge of the evolution of accounting and find how it affected accounting pedagogy, policy and practice. 3. Discuss the basics of ASEAN and recognize how it will affect accountancy practice in the region. 4, Describe the fundamental business model and find how it is applied to the various types of businesses. 5. Distinguish between the different forms and activities of business organizations. 6. Explain the importance of the purpose and phases of accounting. 7. Ascertain the need to adapt Fra Luca Pacioli’s system for the modern times. 8. Explain the fundamental accounting concepts and principles. 9. Understand the income tax of entities per TRAIN Law and CREATE Act. 10. Summarize the salient features of the Accountancy Act of 2004, the Core Competencies Framework and the Code of Ethics for Professional ‘Accountants and harness them to attain professional advancement. 11. Explain why ethics are crucial in accounting. 12. Identify ahd discuss the career opportunities open to accountants. Dennis Rodman, a retired NBA player, is born in Dallas, USA and deserted by his father (who is incidentally residing here in the Philippines) at age three. His mother, Shirley, raised Rodman in a housing project. At 20, he was working as a janitor at the Dallas Airport for $5.0 an hour, but a year later he was arrested there for stealing fifty watches; the charges were dropped when the authorities were able to recover the\goods. Rodman had given them to friends. Then, when he was 21, a local junior college basketball scout suggested that Rodman, who had grown a good half-foot since high school, to try basketball. He tried and failed at first try but on second try at Southeastern Oklahoma State, he made All-American and the grades required to stay in school. Rodman was 25—ancient for a rookie—when he finally landed in the National Basketball Association (NBA). Though Rodman proved his talent as a pivotal member of the two-time champion Detroit Pistons, it took him a long time to catch up in the salary game. He has long been one of the|_ Basic Financial Accounting and Reporting 2022 Edition by Prof. WIN Ballade league's best rebounders, grabbing an average of 15 boards a game, but until 1997, he never earned more than $2.5 million in a single year. During the 1995 playofts, on a day off (at that time he’s playing for the San Antonio Spurs), Rodman was sitting in his kitchen pondering his financial woes with Manley. Manley is his best friend and agent. His $3,800 Ferrari payment was more than a week late. A $9,000 alimony check to ex-wife Annie was looming. And to make matters worse, a half-million dollars he'd borrowed from the Pistons to buy his first house years earlier had gone unpaid for five years now, had ballooned to $745,000 including interest. There are still other dues. All told, Rodman, was close to $1.0 million in debt. Turning to his friend, he said plainly, “I need you to make me some money, Bro.” Manley’s first move was to line up Rodman in autograph sessions for $50 per signature. He negotiated with Rodman’s creditors, telling them if they wanted to get paid in full they'd have to ‘wait awhile, and if they wanted cash today, they could take a discount. And he put together a seven-figure deal to publish Rodman’s autobiography, Bad As ! Wanna Be (Delacorte, 1996), which became an instant bestseller. Rodman agreed to be placed by Manley on $1,000 weekly allowance. He exchanged his, ‘American Express card for a debit card. In the midst of Rodman’s financial makeover, another lucky break: Rodman was traded to the Chicago Bulls. At first, he was not up to the idea. But Manley convinced Rodman that playing with Michael Jordan and Scottie Pippen was the best conceivable way to boost his marketing muscle. By the end of the 1996 NBA season, Rodman had $1.0 million in the bank, a chunk of it from the $150,000 bonus he earned for helping the Bulls make their way to the NBA Championship. He was on track to hit $2.0 million by the end of the year. Plus, he now has a sizeable investment Portfolio (in mutual funds, tech stocks, a controlling interest in a $10 million in sales excavation company). He made a killing in Oakley—maker of the sunglasses he wears “every damn day.” In 1997, according to the Chicago press, Rodman signed an $8.0 million deal with the Bulls. He has endorsement deals with Kodak, Converse and Carl's Jr. among others, He did a movie with Jean Claude Van Damme. He has two more books in production and more scripts than he can count. Appearances in MTV and in wrestling. Romantic episodes with Madonna, Carmen Electra and other celebrities. Rodman, who spends $100 to change his hair from blue to orange to white to whatever, is now out of the NBA because of his eccentricities nonetheless he’s come very far. He is in the news lately because of charges related to child-support. Adapted with editorials from the book—The Rich and Famous Money Book, By Chatzky and other relevant articles. What role does accounting play in the life of Dennis Rodman? Rodman, through the efforts of Manley, used accounting information in one form or another. His manager utilized "budgeting” to help Rodman with his finances. Manley tapped his financial sense in coming out with the idea of “wait awhile to be paid in full or cash today but at a discount.” He certainly did a lot of financial analysis when he positioned Rodman in strategic investments and endorsement deals. Manley needed and relied on accounting information to guide him in his dealings for Rodman. It is his single most important business tool in steering his client, Rodman, from the brink of bankruptcy to possible financial prosperity. °Accounting and Its Environment | 1-3 INTRODUCTION Accounting has evolved, as in the case of medicine and law, in response to the social and economic needs of society. As business and society become more complex, accounting develops new concepts and techniques to meet the ever-increasing needs for financial information. Without such information, many complex economic developments and social programs may never have been undertaken. In @ market economy, information helps decision-makers make informed choices regarding the allocation of scarce resources under their control. When decision-makers are able to make well-informed decisions, resources are allocated in a way that better meets the needs and goals of those within the market. Accounting is relevant in all walks of life, and it is absolutely essential in the world of business. Accounting is the system that measures business activities, processes that information into reports and communicates the results to decision-makers. Accounting Quantifies business communication. For this reason, accounting is called the language of business. The task of learning accounting is very similar to the task of learning a new language; thus, the need for this book which teaches the Basics of Accounting in a very conceptual manner, No business could operate very long without knowing how much it was earning and how much it was spending. Accounting provides the business with these information and More. So, accountants can be called the scorekeepers of business. Without accounting, 2 business couldn't function optimally; it wouldn't know where it stands financially, whether it’s making a profit or not, and it wouldn’t know its financial situation. Also, a sound understanding of this language will bring about a better management of the financial aspects of living, Personal financial planning, education expenses, car amortization, business loans, income taxes and investments are based on. the information system that we call accounting. DEFINITIONS OF ACCOUNTING Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions (statement of Financial Accounting Standards No. 1, “Basic Concepts and Accounting Principles Underlying Financial Statements of Business Enterprises” (Manila: Accounting Standards Council, 1983), par. 1). Accounting is an information system that measures, processes and communicates financial information about an economic entity (statement of Financial Accounting Concepts No. 1, “Objectives of Financial Reporting by Business Enterprises” (Norwalk, Conn, ‘Accounting Standards Board, 1978), par. 9). Financial1-4 | Basic Financial Accounting and Reporting 2022 Edition by Prof. WIN Ballada Accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information (American Accounting Association, “A Statement of Basic Accounting Theory” (Evanston, Il: ‘American Accounting Association, 1966), par. 1; Accounting Principles Board, Statement No. 4, “Basic Concepts and Accounting Principles Underlying Financial Statements of Business Enterprises” (New York: AICPA, 1970), par. 40).. Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof (American Institute of Certified Public Accountants, “Review and Resume”, Accounting Terminology Bulletin No. 1 (New York: AICPA, 1953), par. 9). EVOLUTION OF ACCOUNTING Accounting history is important to accounting pedagogy, policy and practice. It makes it Possible to better understand our present and to forecast our future. Accounting history is the “study of the evolution in accounting thought, practices and institutions in response to changes in the environment and societal needs. It also considers the effect that this evolution has worked on the environment.” Primitive Accounting People have counted and kept records throughout history. The origin of keeping accounts hhas been traced as far back as 8500 B.C, the date archaeologists have established for certain clay tokens—cones, disks, spheres and pellets—found in Mesopotamia (modern Iraq). These tokens represented such commodities as sheep, jugs of oil, bread or clothing and were used in the Middle East to keep records. The tokens were often sealed in clay balls, called bullae, which were broken on delivery so the shipment could be checked against the invoice; bullae, in effect, were the first bills of lading. Later, symbols impressed on wet clay tablets replaced the tokens. Some experts consider this stage of record keeping the beginning of the art of writing, which spread rapidly along the trade routes and took hold throughout the known ized world. ci ‘Account records date back to the ancient civilizations of China, Babylonia, Greece and Egypt. People in these civilizations maintained various types of records of business activities. During the 1* dynasty of Babylonia (2286-2242 B.C), its law which was based on the Code of Hammurabi, requires merchants trading goods to give buyers a sealed memorandum containing the agreed price before it can be considered enforceable. The agreed-upon transaction was recorded by the Scribe (the predecessor of the modern accountant) on a ‘small mound of clay with the parties affixing “their signatures” on it. This clay was allowed to dry and served as the record of the transaction. For the more important ones, the record can be kiln-dried. * Committee on Accounting History, Report of the Committee, Accounting Review, supplement to Vol. XLV; 1920, p.53,Accounting and Its Environment | 1-5 ‘At around 3600 B.C. in Babylonia, clay tablets also recorded payments of wages. The rulers of these civilizations used accounting to keep track of the costs of labor and materials used in building structures as in the case of the pharaohs of Egypt in building their great pyramids. ‘Accounting is one of our oldest skills. The earliest collections of understandable writing track how many bushels of grain came into the king’s warehouse. Tablets recorded who brought in the grain and how much the king took as his share. Even in the early days, tax collecting is an activity closely linked to accounting. The presence of bookkeeping in the ancient world has been attributed to various factors including (i) the invention of writing; (i) the introduction of Arabic numerals; (ii) the decimal system; (iv) the diffusion of knowledge of algebra; (v) the presence of inexpensive writing materials; (vi) the rise of literacy; and (vii) the existence of a standard medium of exchange. A.C. Littleton in Accounting Evolution to 1900 lists seven preconditions for the emergence of systematic bookkeeping: 7 The Art of Writing, since bookkeeping is first of all a record; Arithmetic, since the ‘mechanical aspect of bookkeeping consists of a sequence of simple computations; Private Property, since bookkeeping is concerned only with recording the facts about property and property rights; Money (i.e, among economy), since bookkeeping is unnecessary except as it reduces all transactions in properties or property rights to this common denominator; Credit (i.e. uncompleted transactions), since there would be litle impulse to make any record whatever if all exchanges were completed on spot; Commerce, since a merely local trade would never have created enough pressure (volume of business) to stimulate men to coordinate diverse ideas into a system; Capital, since without capital commerce would be trivial and credit would be inconceivable. Middle Ages [As a result of the Crusades from the 11” to the 13" centuries, Northern Italy's literacy has become widespread. Arabic numerals were also being used as a result of trade with the Near East allowing columns of numbers to be added and subtracted. The use of credit was prevalent and a semblance of an international banking system was also functioning, ‘The Inca Empire, which spanned the west coast of South America throughout the 11" to 14" centuries, used knotted cords of different lengths and colors called quipu to keep accounting records. Development of more formal account-keeping methods is attributed to the merchants and bankers of Florence, Venice and Genoa during the 13" to 15" centuries. Double-entry bookkeeping is not a discovery of science; itis the outcome of continued efforts to meet the changing necessities of trade. German philosopher Oswald Spengler wrote in The Decline of the West (1928) that the invention of double-entry bookkeeping was the decisive event in European economic history. The Florentine Approach Renaissance Florentine markets were a fascinating combination of formalization, in the form ‘of account books and double-entry bookkeeping, and of informal social networks, constructed out of the surrounding rules of Florentine sociality. To them, doing business and living life were extensions of each other. Business was conducted on logic of friendship, but friendship in turn was instrumental, as well as emotional. Account books were not6 | Basic Financial Accounting and Reporting 2022 Edition by Prof. WIN Ballado inconsistent with social exchange; rather, they formalized and made social exchange easi The explosion of commercial credit, at that time, required a system of recording. The earliest evidence of business bookkeeping in Florence, France was evidenced by the bank ledger fragments of 1211 (transcribed in 1887 by Pietro Santini) and with the evelopment of accounting in Tuscany, Italy during the 13th century, as evidenced in the ‘account-books or extracts. But, these were within the framework of the “narrative” or “paragraph” type of accouinting record (a sezioni sovrapposte), perhaps derived from the “charge and discharge” format used in public accounts. The system was primitive; accounts were not related in any special way (in terms of equality for entries), and balancing of the accounts was lacking The emergence of double entry itself, was first witnessed in the “ledgers” of Renieri (or Rinieri Fini & Brothers (1296-1305) and Giovanni Farolfi & Company (1299-1300), Giovanno Farolfi & Company, as appears from the “ledger”, was a firm of Florentine merchants whose head office was at Nimes in Languedoc, in the kingdom of France. The ledger, however, relates exclusively to the branch at Salon, a town in the independent county of Provence. Amatino Manucci was a partner in Giovanni Farolfi & Company, a ‘merchant partnership based in Florence. Financial records that he kept for the firm’s branch in Salon, Provence, survive from 1299- 1300. Although these records are incomplete, they show enough detail to be identified as double-entry bookkeeping. These details include the use of debits and credits and duality of entries. They are the oldest known existing examples of the double-entry system. Amatino Manucci was the inventor of double-entry bookkeeping. He managed to construct ‘a comprehensive and fully-articulated set of double-entry records, with a regular balancing procedure on closure of the General Ledger. He used five books—general ledger, two merchandise ledgers, expenses ledger, and cash book (with the white ledger as a sixth)—constituted what looks very like a true double-entry system, In addition, there were at least two subsidiary books. He gave importance to the aspect of financial control. The books were logically subdivided, with segregation of cash and goods accounts from the main ledger, a perpetual inventory of each line of agricultural produce and each grade of cloth or yarn dealt in, and full records of debtors and creditors, expenses, profits, interest and partners’ drawings, as well as the state of account with the head office at Nimes, and an estimate (15% per annum) of the expected rate of return on capital employed. The Method of Venice Luca Pacioli, a Franciscan friar and a celebrated mathematician, is generally associated with the introduction of double-entry bookkeeping. In 1494 he published his book, Summa de Arithmetica, Geometria, Proportioni et Proportionalita or “Everything about Arithmetic, Geometry, Proportions and Proportionality,” which includes, Particularis de Computis et Scripturis or “Details of Calculation and Recording," describing double-entry bookkeeping. His treatise reflected the practices of Venice at the time, which 2 G.A.Lee (1977), “The Coming of Age of Double Entry: The Giovanni Farolfi Ledger of 1299-1300", Accounting Historians Journal, (2): 79-95.Accounting and Its Environment | became known as the Method of Venice or the Italian method. Therefore, he did not invent double-entry bookkeeping, but rather described what were prevalent accounting practices of the day. ‘Although Pacioli made no claim to developing the art of bookkeeping, he has been regarded as the father of double-entry accounting. He stated that the purpose of bookkeeping was “to give the trader without delay information as to his assets and liabilities.” Pacioli aso advised the computation of a periodic profit and the closing of the books. He said, “Itis always good to close the books each year, especially if you are in a partnership with others. Frequent ‘accounting makes for long friendship.” This Italian bookkeeping prospered with the development of the commercial republics of Italy and the use of the double-entry method in the fourteenth century. Goethe, the famous German poet and dramatist, referred to double-entry bookkeeping as “one of the finest discoveries of human intellect.” Werner Sombart, an eminent economist- sociologist, believed that “double-entry bookkeeping is born of the same spirit as the system of Galileo and Newton.” Savary and Napoleonic Commercial Code The earliest systematized form of accounting regulation developed in continental Europe, starting in France in 1673, The government introduced the submission of an annual fair value statement of financial position to protect the economy from bankruptcies. This legal requirement for businesses to keep accounting records was first introduced in the Ordonnance de Commerce of 1673 which was put through by Jean-Baptiste Colbert during the reign of Louis XIV, and the Napoleonic Commercial Code of 1807, that influenced the bookkeeping provisions of commercial law throughout Continental Europe, Francophone Africa, and beyond, The Napoleonic Code or Code Napoléon is the French civil code, established under Napoléon Bonaparte on March 21, 1804. The Commercial Code was adopted in 1807. Jacques Savary, the elder (1622-1690) in an early accounting text stated, “If this merchandise is starting to deteriorate, or go out of style, or is that which one judges he could find at the factory or wholesalers at 5% less, it must be reduced to this price.” Although this is the oldest known formulation of the lower-of-cost-or-market principle, Vance? reported that several earlier accounting texts recommended current cost rather than historical cost valuation of inventory in specific examples where the market valuation was lower. Inventory valuation at the lower-of-cost-or-market was required by the Code of Commerce in France in 1673*, in Prussia in 1794 (Vance, 1943), and in the German Commercial Code of 1884 (Schmalenbach, 1959, p. 17). As Savary was the principal author, the French Commercial Code of 1673 was also called the Code Savary. In the 17 century, Nicolas Petri was the first person to group similar transactions in a separate record and enter the monthly totals in the journal, rather than recording all transactions seriatim, that is, in a series. In 1769, Benjamin Workman published The American Accountant, the earliest-known American accounting textbook. 3 Vance, L., 1943. The authority of history in inventory valuation, The Accounting Review 18 (3), 219-27. * Littleton, A. C., 1941, A genealogy for "cost or market.” The Accounting Review 16 2), 161-67.Accounting and Reporting 2022 Edition by Prof. WIN Ballada | Basic Finan .d States Steel Industrial Revolution, Corporate Organization, Railroads, U ‘Accounting practice really dates from antiquity but the formation of an accounting profession was closely tied to the rise of a madern industrial society in Britain during the late 18" century. The need for accounting services emerged slowly, but by the early decades of the 19" century a flurry of textbooks and handbooks on accounting had appeared, reflecting the impact of the Industrial Revolution This revolution, which occurred in England from the mid-18 to the mid-19" century, changed the method of producing commercial goods from the handicraft method to the factory system. With this change came the problem of costing for a large volume of products. The specialized field of cost accounting emerged to meet this need for the analysis of various costs. Revolution required yery. This need The growth of shareholders, The expanded business operations initiated by the Industrial increasingly large amount of funds to build factories and purchase mac resulted to the development of the corporate form of organization. corporations spurred the development of accounting. Corporate owners, the were no longer the managers of their business. Managers had to create accounting systems to report to the owners the results of their stewardship of the business. This situation created a need for an independent report to provide assurance that management's financial representations are reliable. Accountancy was still an indeterminate calling in Britain as late as the 1830s. Men then engaged in accounting not only made simple accounts but also found it financially necessary to act as auctioneers, appraisers, agents and debt collectors. The profession was shaped by legislation. Accountancy reached the shores of the United States of America as a natural result of the invest ments being made by British businessmen into the land of opportunities. Railroads, heavy users of debt financing in the late 1800s, were the first American firms to issue balance sheets to absentee creditors. By 1880, the US railroad system had accumulated $4.6 billion of investments which was roughly equivalent to 40% of the ‘American economy's annual output. Depreciation was formally considered given that the railroad companies used higher value and longer-lived equipment—locomotives, rail cars and track—than previous established enterprises. With the hauling of freight, the equipment gradually lost productive capacity and needed to be replaced. This lost presented a financial reporting problem since it was never clear when the wear and tear took place. Also, there's the problem of matching of revenues and expenses. The concept of depreciation was largely ignored until the 1909 US corporate income tax law permitted a deduction for depreciation charges in the calculation of taxable Income. At the beginning of the 20" century, some managers began to use depreciation to smooth reported earnings. A 1912 Journal of Accountancy editorial complained that that depreciation had become a tool used by management to counter fluctuations in profits. In good years, heavy, depreciation charges were made. Bad years saw no provision or an inadequate charge. ‘On Mar. 12, 1903, United States Steel published consolidated financial statements as of Dec. 31, 1902, together with Price Waterhouse & Company’s (PW) assurance that they were audited and found correct. US Steel resulted from the amalgamation of various steel producers at that time. It's the first billion-dollar corporation. It controlled 75% of the US steel business,Accounting and Its Environment | 1-9 ———— Om There existed complex relationships between US Steel and its many subsidiaries such that PW Managing Partner Arthur Lowes Dickinson believed that the stockholders could be informed adequately of the entity's relative financial condition only through a consolidation of accounts. US Steel's consolidated financial statements rapidly became a landmark in accounting history. The era of modern financial accounting had dawned. Scientific American wrote that it was “the most complete and circumstantial report ever issued by any great ‘American corporation,” noting that the company’s total assets of over $1.50 billion dwarfed the $50 million appropriated by Congress for the Spanish-American War several years earlier. ‘Schmalenbach and The Model Chart of Accounts Eugen Schmalenbach (1873-1955) was a German academic and economist. He was born in Halver, and attended the Leipzig College of Commerce starting in 1898. Schmalenbach was a professor at the University of Cologne and as a contributor to German language journals on the subjects of economics, business management and financial accounting. In the early 1920s, Professor Schmalenbach was frustrated repeatedly with his failure to compare meaningfully the financial data made available by different companies. This led to a research on the problem and the publication of his book, The Model Chart of Accounts. With this book, he laid the foundation for all subsequent developments in uniform accounting in Germany. It also became the basis for corresponding efforts in other European countries. Schmalenbach claimed that important information could be gained from a firm’s accounts. The results of one’s firm should show through-flows more usefully than balances. What he termed "Dynamic Balances" were to be promptly and regularly prepared and presented, so that external changes and internal efficiencies could be gauged. Inter-firm comparisons were also to be facilitated. Imposition of Income Tax and Conflicts with Financial Accounting In the year 10 CE, Xin Dynasty's Emperor Wang Mang instituted an unprecedented tax—the income tax—at the “rate of 10% of profits, for professionals and skilled labor.” To pay for weapons and equipment in preparation for the Napoleonic wars, William Pitt the Younger of Britain levied an income tax in his budget of December 1798. The 1862 Union Government established the Bureau of Internal Revenue to assess personal and corporate income taxes to help finance the Civil War. In 1943, the US Congress passed income tax withholding as the only way to collect on high tax rates to fund World War Il. The Philippines’ Bureau of Internal Revenue (BIR) was created through the passage of Reorganization Act No. 1189 dated July 2, 1904. On August 1, 1904, the BIR was formally organized and made operational under the Secretary of Finance. Financial accounting is conservative and it's about matching efforts and results. Tax accounting, in turn, is about improving the amount and timing of collections. Note that “taxes are the lifeblood of the government and their prompt and certain availability are an imperious need (Commissioner vs. Pineda, 21 SCRA 105).” This difference in perspective produces conflicts. Note that all returns required to be filed by the Tax Code shall be prepared always in conformity with the provisions of the Tax Code. In case of conflicts with generally accepted accounting principles (GAAP), in the final reckoning, the Tax Code will prevail.1.10 | Basic Financial Accounting and Reporting 2022 Editon by Prof. WIN Balada Information Age Dan Grinklin and Bob Frankston wrote VisiCalc for the Apple ll, the first electronic Spreadsheet, the most important business application for the personal computer. Tremendous advances in information technology have further revolutionized accounting in recent years. Tasks those are time-consuming when done manually can: now be done with speed, consistency, precision and reliability by computers, There is an abundance of accounting applications and modules to suite the businesses’ various needs. With the Proliferation of netbooks and smartphones along with its mind-boggling array of applications, surely, doing business will change. This will necessarily bring changes to the field of accounting. As they say, information technology is it, you either breathe it or perish. ASEAN Establishment and Member States The Association of Southeast Asian Nations, or ASEAN, was established on Aug. 8, 1967 in Bangkok, Thailand, with the signing of the ASEAN Declaration (Bangkok Declaration) by the Founding Fathers of ASEAN, namely: Indonesia, Malaysia, Philippines, Singapore and Thailand. Brunei Darussalam then joined on Jan. 7, 1984, Viet Nam on July 28, 1995, Lao PDR and Myanmar on July 23, 1997 and Cambodia on April 30, 1999, mal up what is today the ten Member States of ASEAN. Vision What is ASEAN? In a nutshell, the Vision: "a stable, prosperous and highly competitive ‘ASEAN Economic Region in which there is a free flow of goods, services, investment and a freer flow of capital, equitable economic development and reduced poverty and socio- economic disparities. Opportunities What are the opportunities? Ten member states with a 2013 population of 625 million, ASEAN is characterized by rising incomes, young population, with combined gross domestic product (GDP) at current prices of US$2,399 billion or a GOP per capita at current prices of USS3,839 and GDP growth rate of 5.1. Four Pillars of ASEAN Economic Community The ASEAN Community is comprised of three pillars, namely: the ASEAN Political- Security Community, ASEAN Economic Community and ASEAN Socio-Cultural Community. In turn, the ASEAN Economic Community (AEC is the blueprint) has four pillars, They are as follows: Single market and production base (measures to ensure the free flow of goods, services, investment, capital, skilled labor, priority integration sectors), competitive economic region (actions on competition policy, consumer protection, intellectual property rights, infrastructure development, taxation, e-commerce), equitable economic development (SME development, initiative for ASEAN integration)Accounting and Its Environment | 1-11 and integration into the global economy (coherent approach towards external economic relations, enhanced participation in global supply networks), What are the priority integration sectors? Goods (agro-based goods, automotive products, electronics/electrical, fisheries, rubber-based goods, textiles/clothing and wood-based products). Services (air transport, e-ASEAN, health care services, logistic, tourism) ASEAN Framework Agreement on Services ASEAN is a government-to-government cooperation. To realize its dreams, ASEAN has progressively entered into more legally binding and institutionalized agreements through the adoption of the ASEAN Trade in Goods Agreement (ATIGA), the ASEAN Comprehensive Investment Agreement (ACIA) and the ASEAN Framework Agreement on Services (AFAS), ‘AFAS aims to provide greater mobility of ASEAN professionals to provide their services in the region. This will require rounds of negotiations to liberalize trade in services. Mutual Recognition Arrangements and ASEAN Chartered Professional Accountant MRAs ‘(mutual recognition arrangements) are contracts between a National Accountancy Body (NAB) and/or Professional Regulatory Authority (PRA) from countries that have signed the General Agreement on Trade in Services in 1995 allowing professional service providers registered in signatory countries to be equally recognized in another signatory country. The existing MRAs: for engineering (MRA 2005), nursing (MRA 2006), architectural (MRA 2007), medical (MRA 2009), dental (MRA 2009), accountancy (MRA 2014) and surveying (MRA Framework 2009) services. A Professional Accountant is eligible to apply through the Monitoring Committee of his Country of Origin, to be registered as an ASEAN Chartered Professional Accountant (ACPA) on the ASEAN Chartered Professional Accountant Register (ACPAR) subject to certain qualifications enumerated in Article 4 of the ASEAN MRA on Accountancy Services signed last Nov. 13, 2014. The Monitoring Committee shall assess the Professional Accountant according to the Guidelines on Criteria and Procedures in Appendix I of the MRA; and guided by Appendix Ill in preparing an Assessment Statement for the purpose of the application. It will then submit the application to the ASEAN Chartered Professional Accountant Coordinating Committee (ACPACC). ACPACC shall have the authority to confer and withdraw the title of ACPA or ASEAN Chartered Professional Accountant. To practice in a host country, an ACPA need to apply to become a Registered Foreign Professional Accountant (RFPA). Upon approval, the successful ACPA applicant shall be subject to the domestic regulations, be permitted to work as a RFPA, not in independent practice, but in collaboration with designated Professional Accountants in the host country, within such area of his own competency as may be approved by the NAB (in our case, the Philippine Institute of CPAs) and/or PRA (the Professional Regulation Commission and the Board of Accountancy) of the host country.Ballad 1-12 | Basic Financial Acounting and Reporting 2022 Edition by Prof. WIN. ASEAN Qualifications Reference Framework (AQRF) AQRF, a common reference framework, functions as a device to enable comparisons of qualifications of skilled labor across ASEAN Member States. The frame arcane others, supports recognition of qualification, promote quality of ehation " arin, and facilitate labor mobility. It addresses all education and training, inclu ing forma non-formal and informal learning. Noting that ASEAN Member States are at different stages of development, each country is expected to voluntarily comply with the AQRF at their own capacity and start the referencing process by 2016 and at the latest by 2018, The development of an AQRF specifically supports the implementation of ASEAN Economic Community Blueprint. It aims to facilitate the free flow of services through Fecognition of professional qualifications as well as the ASEAN Socio-Cultural Community Blueprint which targets to establish national skills frameworks as an incremental approach towards an ASEAN skills recognition framework. According to former PRC Chair Teresita R. Manzala, the ASEAN Member States have agreed on 2018 as the target for the referencing of their national qualifications frameworks with the ASEAN Qualifications Reference Framework. This framework will function as a device to enable comparisons of qualifications and providing the concept of “best fit” between Qualifications from different countries, FUNDAMENTAL BUSINESS MODEL For a business to be successful, it needs to develop a product or service that customers will pay for and thus create a revenue stream. It can be a new product or service that meets specific needs. It can also be a better product or service. Or, it can a product or service that offers a better value proposition. A business requires investments to enable it to pay for the infrastructure, equipment and personnel. Only after a skillful Combination of these elements can a business generate a revenue stream. Figure 1-1 illustrates how a business is structured to provide a customer proposition. The business model is built on five activities: 1. First, the investors provide the required capital for the business. The cash investment will then be held in a bank account. 2, The cash in the business can be: “converted into another type of asset that will be used in the business (eg equipment) or sold (e.g. inventory); or * spent on operating costs such as salaries, rentals and utilities 3. The combination of business resources provides the basis fr producing the products or services.‘Accounting and Its Environment | 1-13 ig a Business Gunee Operating Producto cash pon Serion Banks 2a 3 2 5 2 Costs Figwe 1-1 Fundamental Business Mode 4, The sale of a product or service generates an asset called a receivable. This asset once collected will produce a cash inflow for the business. 5. If there's an existing debt from banks, the cash inflow from collections will be used to provide the debt providers with interest on their loans to the company. The rest of the cash can be sent back to the cycle by being converted into other assets or spent on operating costs (back to stage 2). In the normal course of business, this whole process will earn profits on which tax will have to be paid. Any profit after tax can continue to be reinvested in the cycle or paid out to the owners as a "return" on their investments, The model illustrates the way money flows around a business and provides the basis of accounting. To manage a business effectively it is important to know how the cash has been spent and how profitable the products or services have been to the business. The availability of this historic information helps management to make judgments on how to improve the performance of business. TYPES OF BUSINESS ‘Although the fundamental business model does not vary, there are infinite ways of applying it to provide the range of products and services that make up the business world. However, the range of products and services can be summarized in seven broad categories, they are as follows:1-14 | Basic Financial Accounting and Reporting 2022 Edition by Prof. WIN Ballad, Type Services Trader Manufacture Raw materials Infrastructure Financial Insurance Activity Selling people's time Buying and selling products Designing products, aggregating ‘components and ‘assembling finished products Growing or extracting raw materials Selling the utilization of infrastructure Receiving deposits, lending and investing money Pooling premiums of many to meet claims of afew Structure Hiring skilled staff and selling their time Buying a range of raw ‘materials and manufactured goods and consolidating them, ‘making them available for sale in locations near to their customers or online for delivery Taking raw materials and using equipment and staff to convert them into finished ‘goods Buying blocks of land and using them to provide raw materials Buying and operating assets (typically arge assets); selling ‘occupancy often in ‘combination with services ‘Accepting cash from depositors and paying them interest; using the money to provide loans to borrowers, charging them fees and a higher rate of interest than the depositors receive Collecting cash from many customers; investing the money to pay the losses experienced by a few customers. By understanding the risk accepted and the likelihood of a claim, more premium income can be earned than claims paid Examples Software development ‘Accounting Legal Wholesaler Retailer Vehicle Assembly Construction Engineering Electricity, Water Food and drink Chemicals Media Pharmaceuticals Farming Mining oi Transport (airport operator, airlines, trains, ferries, buses) Hotels Telecoms Sports facilities Property management Bank Investment house InsuranceAccounting and Its Environment | 1-15 SS FORMS OF BUSINESS ORGANIZATIONS Any of the above types of activities may be performed by a business organization be it a sole proprietorship, a partnership or a corporation, A business generally assumes one of the three forms of organization. The accounting procedures depend on which form the organization takes. Sole Proprietorship. This business organization has a single owner called the proprietor who generally is also the manager. Sole proprietorships tend to be small service-type (e.g. physicians, lawyers and accountants) businesses and retail establishments. The owner receives all profits, absorbs all losses and is solely responsible for all debts of the business. From the accounting viewpoint, the sole proprietorship is distinct from its proprietor. Thus, the accounting records of the sole proprietorship do not include the Proprietor’s personal financial records Partnership. A partnership is a business owned and operated by two or more persons who bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. Each partner is personally liable for any debt incurred by the partnership. Accounting considers the partnership as a separate organization, distinct from the personal affairs of each partner. See Chapter 12. Corporation. A corporation is a business owned by its stockholders. It is an artificial being created by operation of law, having the rights of succession and the powers, attributes and properties expressly authorized by law or incident to its existence. The stockholders are not personally liable for the corporation's debts. The corporation is a separate legal entity. See Chapter 14. MICRO, SMALL AND MEDIUM ENTERPRISES Big business may be the country’s top taxpayers and highest paying employers. Collectively, though, micro, small and medium enterprises (MSMEs) provide employment for 61% of the country's labor force. According to the National Statistics Office, MSMEs in 2010 accounted for 99.6% of the total business enterprises at 777,687. The 99.6% is broken down as follows: micro enterprises, 91.6% and SMEs, 8% In terms of economic output, MSMEs account for ‘only 32%. Then, 68% of the economy's total output can be attributed to the largest 0.4% of Philippine enterprises, or 3,023 out of a total 777,687 firms counted in 2010. But MSMEs hold the key to our economic progress, the challenge lies in being able to increase productivity of the MSMEs; also, there’s a need to further increase their number and in the process help create more jobs. MSMEs in China provide 74% of the jobs and in Japan, 78%; in ASEAN, 68% in Singapore, 77% in Thailand and 97% in Indonesia, Indonesia's MSMEs contribute 57% to gross domestic product.‘on by Prof. WIN Ballada 16 | Basic Financial Accounting and Reporting 2022 Edition by PE a by President Gloria On May 23, 2008, Republic Act No. 9501 was eee a ee particularly the Macopagal-Arroyo. This law seeks to address problems Facing ter ions lack of capital and access to credit. Under the law, banks and NaN MG Ie es hte now required to allocate at least 10% of thelr total Ioan portnlis WN nn down as follows: 8% to micro and small enterprises, and The old law provided only for a total of 8%. jovernment financial The new law also gives the Small Business Corporation, the 8° 5 ing its authorize institution created to assist MSMEs, mote financial muscle by increasing d capital stock to P10.0 billion, The law also updated the definitions of MSMEs by increasing the net assets threshold, Micro enterprises are those with assets, before financing, of P3.0 (before P1.5 million) or less and employ not more than nine workers. Small enterprises are those with assets, before financing, of above P3.0 (before P1.5 million) to P15 million and employ 10 to 99 workers. Medium enterprises have assets, before financing, of above P15 million to P100 million and employ 100 to 199 workers. More than ever, the government should promote and build an entrepreneurial culture and environment to spark an entrepreneurial revolution among the Filipino youth. In the US, 97% of the 28 million firms are small-and medium-scale enterprises (SMEs) with less than US$1.0 million annual gross sales. This means that even in advanced economies, SMEs make up a big majority in terms of numbers. In China, entrepreneurship has taken 250 million Chinese out of poverty over the last decades. ACTIVITIES IN BUSINESS ORGANIZATIONS Many types of decisions are made in business organizations. Accounting provides important information to make these decisions. The three types of organizational activities are as follows: financing, investing, and operating, Organizations require financial resources to obtain other resources used to produce goods and services. They compete for these resources in finan activities are the methods an organization uses to obtain financial resources from financial markets and how it manages these resources. Primary sources of financing for most businesses are owners and creditors, such as banks and suppliers. Repaying the creditors and paying a return to the owners are also financing activities \cial markets. Financing I from financing activities to acquire other resources used in the transformation process—that is, to transform resources from one form to a different form, which is more valuable, to meet the needs ofthe people. Having the right mix of resources is essential to efficient and effective operations.‘Accounting and Its Environment | 1-17 —_—_— SS An efficient business is one that provides goods and services at low costs relative to their selling prices. An effective business is one that is successful in providing goods and services demanded by the customers. Investing activities involve the selection and management including disposal and replacement of long-term resources that will be used to develop, produce, and sell goods and services. Investing activities include buying land, equipment, buildings and other resources that are needed in the operation of the business, and selling these resources when they are no longer needed. Operating Activities Operating activities involve the use of resources to design, produce, distribute, and market goods and services. Operating activities include research and development, design and engineering, purchasing, human resources, production, distribution, marketing and selling, and servicing. Organizations compete in supplier and labor markets for resources used in these activities. Also, they compete in product markets to sell the goods and services created by operating activities. PURPOSE AND PHASES OF ACCOUNTING ‘The accounting function is part of the broader business system, and does not operate in isolation. It handles the financial operations of the business but also provides information and advice to other departments. Business transactions are the economic activities of a business. Recording these historical events is a significant function of accounting. Accounts are produced to aid management in planning, control and decision-making and to comply with regulations, Before the effects of transactions can be recorded, they must be measured. In order that accounting information will be useful, it must be expressed in terms of a common financial denominator—money. Money serves as both a medium of exchange and a measure of value. To measure a business transaction, the accountant must decide when the transaction ‘occurred (recognition issue), what value to place on the transaction (valuation issue) and how the components of the transaction should be classified (classification issue). By simply measuring and recording transactions, the resulting information will be of limited use. To be useful in making decisions, the recorded data must be classified and summarized. Classification reduces the effects of numerous transactions into useful groups or categories. Summarization of financial data is achieved through the preparation of financial statements. These summarize the effects of all business transactions that occurred during some period.1-18 | Basic Financial Accounting and Reporting 2022 Edition by Prof WIN Balloda. After going through the preceding phases, it is imperative that the result of the summarization phase be interpreted or analyzed to evaluate the liquidity, profitability and solvency of the business organization, Accounting provides the decision-makers with information to make reasoned choices among alternative uses of scarce resources in the conduct of business and economic activities. PACIOLI’S DOUBLE-ENTRY BOOKKEEPING AND ITS EVOLUTION In Fra Luca Pacioli’s book, Summa, there are 36 short chapters on bookkeeping. Luca states that to be successful every merchant needs three essential things: sufficient cash or credit, a good bookkeeper, and an accounting system to view the business affairs at a glance. He discusses three books in the Summa: the memorandum, the journal and the ledger. In Pacioli’s book, he introduces the double-entry accounting system—in which for every debet dare (should give) there exists a debet habere (should have or should receive). Modern bookkeeping systems are still based on principles established in the 15" century, although they have had to be adapted to suit modern conditions. In Summa, the memorandum is the book where all transactions are recorded, in the currency in which they are conducted, at the time they are conducted. The memorandum, prepared in chronological order, is a narrative description of the business’s economic events. The memorandum is necessary because there are no documents to support transactions. The second book, the journal, is the merchant's private book. The entries made here are in one currency, in chronological order, and in narrative form. The last book, known as the ledger, is an alphabetical listing of all the business’s accounts along with the running balance of each particular account. What is interesting is that Pacioli never discusses financial statements, that is, statements prepared to communicate the results of business activities to interested users. At that time, financial statements are unnecessary because businesses are still closely controlled by owners who can examine the business’s records. However, Pacioli does advocate an annual balancing to determine the success or failure of the business and to find errors. Why has a recording system devised in medieval times lasted for so long? There are two main reasons: it provides an accurate record of what has happened to a business over a specified period of time; and information extracted from the system can help the owner or the manager operate the business much more effectively. In essence, the system provides the answers to three basic questions which owners want to know: What profit has the business made? How much does the business owe? How much is owed to it?Accounting and its Environment | 1-19 The medieval system dealt largely with simple agricultural and trading entities. Modern systems have to reflect complex industrial operations and sophisticated financial arrangements, Furthermore, a business may be so big or so complex nowadays that the ‘owners have to employ managers to run it for them. Indeed, the senior managers themselves may largely depend upon their junior colleagues to tell them what is happening. A traditional bookkeeping system did not have to deal with situations where ‘owners were separated from managers. It was designed largely to supply summarized information only to the owner-managers of a business who knew in detail from their ‘own experience what was going on. The system was not intended to cope with frequent day-to-day reporting remote from production or trading operations. As a result, Pacioli’s system had to be adapted for modern business practice so that it can satisfy the demand for information from two main sources: 1. from owners, who want to know from time to time how the business is doing; 2. from the managers, who need information in order to help plan and control it. Owners and managers do not necessarily require the same information and so based on this accounting has developed into two main specializations: 1. Financial Accounting, which is concerned with the supply of information to the ‘owners of an entity; and 2. Management Accounting, which is concerned with the supply of information to the managers of an entity. While it is useful to classify accounting into these two broad categories, accountants are now involved in supplying information to a wide range of other interested parties, such as customers, employees, governments and their agencies, investors, lenders, the public and suppliers and other trade creditors. FUNDAMENTAL CONCEPTS Several fundamental concepts underlie the accounting process. In recording business transactions, accountants should consider the following: Entity Concept. The most basic concept in accounting is the entity concept. An accounting entity is an organization or a section of an organization that stands apart from other organizations and individuals as a separate economic unit. Simply put, the transactions of different entities should not be accounted for together. Each entity should be evaluated separately. Periodicity Concept. An entity's life can be meaningfully subdivided into equal time periods for reporting purposes. It will be aimless to wait for the actual last day of operations to perfectly measure the entity's profit. This concept allows the users to obtain timely information to serve as a basis on making decisions about future activities For the purpose of reporting to outsiders, one year is the usual accounting periodWIN Ballado 20 | Basi Financial Accounting and Reporting 2022 Edltion by Prof Stable Monetary Unit Concept. The Philippine peso is a reasonable unit of measure and that its purchasing power is relatively stable. It allows accountants to add and subtract peso amounts as though each peso has the same purchasing power as any other peso at any time. This is the basis for ignoring the effects of inflation in the accounting records, Going Concern, Financial statements are normally prepared on the assumption that the reporting entity is a going concern and will continue in operation for the foreseeable future. Hence, it is assumed that the entity has neither the intention nor the need to enter liquidation or to cease trading. This assumption underlies the depreciation of assets over their useful lives. The COVID19 pandemic continues to cause significant deterioration in economic conditions for many entities worldwide. The economic Uncertainties may cast doubt on the entity's ability to continue as a going concern. CRITERIA FOR GENERAL ACCEPTANCE OF AN ACCOUNTING PRINCIPLE ‘Accounting practices follow certain guidelines. GAAP, which stands for generally accepted accounting principles, encompass the conventions, rules and procedures necessary to define accepted accounting practice at a particular time. Accounting principles are established by humans. Unlike the principles of physics, chemistry, and the other natural sciences, accounting principles were not deduced from basic axioms, nor can they be verified by observation and experiment. Instead, they have evolved. This evolutionary process is going on constantly; accounting principles are not eternal truths. The general acceptance of an accounting principle usually depends on how well it meets three criteria: relevance, objectivity and feasibility. 1. Aprinciple has relevance to the extent that it results in information that is meaningful ‘and useful to those who need to know something about a certain organization, A principle has objectivity to the extent that the resulting information is not influenced by the personal bias or judgment of those who furnish it. Objectivity connotes reliability and trustworthiness. It also connotes verifiability, which means that there is some way of finding out whether the information is correct. 3A le has feasibility to the extent that it can be implemented without undue complexity or cost. These criteria often conflict with one another. In some cases, the most relevant solution may be the least objective and the least feasible. BASIC PRINCIPLES In order to generate information that is useful to the users of financial ‘statements, accountants rely upon the following principles: Objectivity Principle. Accounting records and statements are based on the most reliable data available so that they will be as accurate and as useful as possible, Reliable data are verifiable when they can be confirmed by independent observers, Ideally, accounting records are based on information that flows from activities documented byAccounting and Its Environment | 1-21 objective evidence. Without this principle, accounting records would be based on whims and opinions and is therefore subject to disputes. Historical Cost. This principle states that acquired assets should be recorded at their actual cost and not at what management thinks they are worth as at reporting date, Revenue Recognition Principle. Revenue is to be recognized in the accounting period when goods are delivered or services are rendered or performed. Expense Recognition Principle. Expenses should be recognized in the accounting period in which goods and services are used up to produce revenue and not when the entity ays for those goods and services. Adequate Disclosure. Requires that all relevant information that would affect the user's understanding and assessment of the accounting entity be disclosed in the financial statements Materiality. Financial reporting is only concerned with information that is significant enough to affect evaluations and decisions. Materiality depends on the size and nature Of the item judged in the particular circumstances of its omission. In deciding whether an item or an aggregate of items is material, the nature and size of the item are evaluated together. Depending on the circumstances, either the nature or the size of the item could be the determining factor. Consistency P le. The firms should use the same accounting method from period to period to achieve comparability over time within a single enterprise. However, changes are permitted if justifiable and disclosed in the financial statements. TAXATION OF BUSINESS ORGANIZATIONS (per TRAIN Law and CREATE Act) In a nutshell, the income tax for each of the following taxpayers is derived as follows: Sole Proprietorship An individual taxpayer, a Filipino citizen or a resident alien’, can be classified as a compensation, business or mixed income earner. 1. Individuals earning ‘purely compensation® income shall be taxed based on the graduated income tax rates (from 20% to 35% effective Jan, 1, 2018 to Dec. 31, 2022; from 15% to 35% effective Jan. 1, 2023 onwards) prescribed under Sec. 24(A) of the Tax Code. 5 An individual whose residence is within the Philippines and who is nota citizen thereof. « in general, compensation income means all remiuneration for services performed by an employee for his ‘employer under an employer-employee relationship, unless specifically excluded by the Tax Code.y Prof. WIN Balada 2_|_ Basic Financial Accounting and Reporting 2022 Edition mpensation income less fe fers is the gross compen Taxable income’ for compensation earn sonnet non-taxable income/benefits such as but not limited benefits, other benefits (subject to limitation of 90,000), de ens spanetes ne employee's share in the SSS, GSIS, PHIC, Pag-IBIG contributions an . See Chapter 11 of this book, Payroll. Gross Compensation Income Pano: Less: Non-Taxable/Exempt Compensation ee Gross Taxable Compensation Income Pe 2. Business Income arises from self-employment or practice of profession. This shall not include income from performance of services by the taxpayer as an employee. Individuals earning income purely from self-employment and/or practice of profession whose gross sales/receipts and other non-operating income (GSRONO!) do not exceed the P3.0 million value-added tax (VAT) threshold, shall have the option to avail of: a. the graduated rates under Sec. 24(A) of the Tax Code, as amended; or b. 8% tax of GSRONO! in excess of P250,000* in lieu of the graduated income tax rates under Sec. 24(A) and the percentage tax under Sec. 116 under the Tax Code, as amended. Gross Sales/Receipts Pxxx Less: Cost of Sales x Gross Income Pxxx Less: Operating Expenses xx Taxable Income (if graduated rates) Pox 3. Mixed Income Earners. There are individuals who earn income both from compensation and from self-employment (business or practice of profession). They shall be subject to the following taxes: a. On compensation income ~ at graduated rates; plus b. On income from business or practice of profession shall be subject to the following: b.1. If GSRONO! do not exceed the VAT threshold — either at graduated rates or ‘* 8% of GSRONOI in lieu of graduated rates and percentage tax, at the ‘option of the taxpayer. b.2. IF GSRONOI exceed the VAT threshold ~ at graduated rates, ? Taxable Income refers to the pertinent items of gross income specified in the Tax ¢: 'e Tax Code, less ons, i any, authorized for such types of income by the Tax Code or other special laws, sedated cated‘Accounting and Its Environment | 1-23 Se * The P250,000 mentioned is not applicable to mixed income earners since itis already incorporated in the first tier of the graduated income tax rates applicable to compensation income. Partnership There are two classifications of general partnerships in taxation: 1. General Professional Partnership (GPP). One formed by persons for the sole Purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business. A general professional partnership (GPP) shall not be subject to the income tax but is required to file annual income tax return/annual information return for the Purpose of furnishing information as to the items of gross income, deductions, and the names, tax identification numbers (TINs), addresses and share of each of the Partners. Partners in a general professional partnership shall be liable for income tax in their separate and individual capacities. Where the result of partnership operation is a loss, the loss will be divided as agreed upon by the partners. If there is no agreement as to division of losses but there is as to profits, the losses shall be distributed according to the profit-sharing ratio. Such share in the losses may be taken up by the individual partners in their respective income tax returns. ‘A GPP may avail of the optional standard deduction (OSD) only once, either by the GPP or the partners comprising the partnership. 2. General Co-Partnership (compania colectiva). A general partnership which is not a general professional partnership. Partnerships (other than GPPs), whether registered or not, are considered as corporations and are therefore taxed as corporations Corporation A corporatior either a domestic or a foreign corporation. 1, Domestic Corporation is one that is created or organized in the Philippines or under its laws. For domestic corporations, in general, an income tax rate of 25% effective 2020, is hereby imposed upon the taxable income derived during each tax. from all sources within and without the Philippines. e July 1, ble yearada 1-24 | Basic Financial Accounting and Reporting 2022 Edition by Prof. WIN Bala it f domestic a Generally, the pro-forma computation of the normal income tax of nd resident foreign corporations follows: Gross income oor Less: Allowable Deductions ek Taxable Net Income ro Multiply by: Tax Rate Es Income Tax Due 20 For domestic corporations with net taxable income not exceeding P5.0 million and with total assets not exceeding P100 million excluding land on which the particular business entity's office, plant and equipment are situated during the taxable year, shall be taxed at 20% effective July 1, 2020. The above computed “normal income tax due” will be compared with the “minimum corporate income tax” (MCIT). When MCIT is higher than the normal tax due, then the MCIT amount will be the basis. ‘A MCIT of 2% of the gross income as of the end of the taxable year is imposed on any taxable corporation beginning on the fourth (4th) taxable year immediately following the year in which such corporation commenced its business operations, when the MCIT is greater than the tax computed using the normal income tax rate provided that effective July 1, 2020 until June 30, 2023, the rate shall be 1%. 2. Foreign Corporation. When applied to a corporation, means a corporation which is not domestic. a. Resident Foreign Corporation. Applies to a foreign corporation engaged in trade or business within the Philippines. The applicable income tax is 25% effective July 1, 2020 with MCIT, Non-Resident Foreign Corporation. Applies to a foreign corporation not engaged in trade or business within the Philippines. Generally, the pro- forma computation of the income tax of non-resident foreign corporations follows: Gross Income i Multiply by: Tax Rate (effective Jan. 1, 2022) 25% Final Income Tax Withheld = At intial glance, the above discussion on taxation may be overwhelming but do not worry as you gain more knowledge, you will find them very manageable. ‘They will be tackled in detail in another book, Income Taxation Made Easy 2022 Edition by prot, Win Ballada and Susan Ballada.‘Accounting and Its Environment | 1-25 a 0 0D ACCOUNTANCY IN THE PHILIPPINES Although accounting has been practiced in the Philippines since the Spanish period and possibly even before, the seeds of Philippine accountancy as a recognized profession were planted on March 17, 1928, when Act No. 3105 was approved by the Sixth Legislature. Entitled “An Act Regulating the Practice of Public Accounting; Creating the Board of Accountancy; Providing for Examination, for the Granting of Certificates, and the Registration of Certified Public Accountants; for the Suspension or Revocation of Certificates; and for Other Purposes,” the law paved the way for local accountants to do the work which, up to that time was performed by foreign accountants in the country. Since then, both the profession and the body that directly regulates it have grown rapidly. From 43 registered accountants in 1923, the number of CPAs has grown to over 100,689 by 1999 and conservatively, at least 160,000 as at today. In May 2015, 2,132 new CPAs were added to the roster. In Oct. 2014, it’s 4,123. In July 2014, it’s 1,107. In Oct. 2013, it’s 4,246. in May 2013, it’s 1,553. In Oct. 2012, it’s 4,772. In May 2012, it's 1,995. In Oct. 2011, it's 4,066. In May 2011, it’s 2,130. In 2010, it was 5,859. In 2009, it’s 4,119. In 2008, it’s 3,710; in 2007, 3,705. Many of these professionals have guished themselves not only in the field of accountancy itself but in many other areas of human endeavor. To the roster of Philippine CPAs belong such luminaries, past and present: "Don Vicente Fabella, in 1915, became the first Filipino CPA in the United States (passed the Milwaukee, Wisconsin CPA Board Exams), and founder of Jose Rizal University (RU) in 1919; * Dr. Nicanor Reyes, founder and first President of the Far Eastern University (started in 1928 as the Institute of Accountancy, which later became the Institute of ‘Accounts, Business and Finance, and then registered as the Far Eastern University in Jan. 31, 1934 [the official birthday, though, is Nov. 5, 1933)), Mr. FEU died a hero during wwil; = Belen Enrile-Gutierrez, first Filipina CPA and one of the seven original trustees of FEU in 1933; + Jaime Hernandez and Paciano Dizon, the first and second Filipino Auditor Generals of the Commission on Audit; = Manuel Villar, Filipino tycoon, former Speaker of the House of Representatives, Senate President, and 2010 Presidential Candidate of the Nacionalista Party; = Washington SyCip, past president of the International Federation of Accountants, the only Asian who has held the position and Founder and Past Chairman of SGV & Co,, the leading accountancy firm in the country; Jose W. Diokno, former Senator of the Philippines and Secretary of Justice; = Wenceslao Lagumbay, former Senator of the Philippines; + Alberto Romulo, former Senator of the Philippines, Executive Secretary and Secretary of Foreign Affairs; + Andres Soriano, founder of one of the country's leading conglomerates; and = Manuel Morales, was a full-time member of the Monetary Board of the Bangko Sentral ng Pilipinas during the Ramos presidency, had a long career in private banking (42 years), 21 years of which were spent as Board Chair of Manila Bankingof. WIN Batlada 1.26 | Basic Financial Accounting and Reporting 2022 Edition by Prof Wil a the one who decided Corp. and Equitable Bank; a working stent in FEU andl was ihe Mh et A to award to this humble author a college scholarship (in 198} kim Pah Scholarship of Equitable Bank; and + many others who have been cabinet members, head chairmen and members of corporations and institutions, deans, professors in the academe, and entrepreneurs. Is of government agencies, heads and Local accounting firms and partnerships have likewise entered the mainstream of international practice, establishing tie-ups with the Big Five of the accounting world, namely, Arthur Andersen (now defunct), PriceWaterhouseCoopers, Ernst & Young, KPMG, and Deloitte Tohmatsu International. The biggest of the local firms, SGV & Co., was the first to offer services outside the country and initiated the establishment of The SGV Group composed of leading national accounting firms in East and Southeast Asia, The increasing complexity of professional regulation and the developments in the practice of the profession have occasioned the expansion of the Board of Accountancy ~ from three members (president and two members) under Act No. 3105 in 1923, through six (chairman and five members) under Republic Act No. 5166 (“The Accountancy Act of 1967") in 1967, to seven (chairman and six members) under Presidential Decree No. 692 ("The Revised Accountancy Law*) in 1975. Republic Act No. 9298 ("The Philippine Accountancy Act of 2004") still provides for the same composition. Under the stewardship of the Professional Regulation Commission (PRC), the Board of Accountancy discharges its mandate of supervising, controlling and regulating the practice of accountancy with authority and distinction. But over and above its regular functions of standardizing and regulating accounting education, conducting ‘examinations for registering CPAs, and maintaining the rules of the practice, the Board hhas taken the lead in raising the standards of the profession to a very high level of excellence, {In 1975, with the accreditation by the PRC of the Philippine Institute of Certified Public Accountants (PICPA) as the bona fide professional organization representing CPAs in the country, the Board has coordinated with PICPA to further strengthen the profession. With PICPA, it has worked for the passage of The Accountancy Act of 1967; the issuance of the Code of Professional Ethics in 1978; the issuance of guidelines in 1987 for the mandatory continuing professional education (CPé) program for CPAs; the integration of the accounting profession completed in 1987; the biennial oath-taking of new CPAS; standards setting for the profession through membership in the Accounting standards Council (now FRSC) and the Auditing Standards Practices Council (now ASC); the declaration of the Accountancy Week, the new Code of Ethics (eff. June 30, 2008), and The Accountancy Act of 2004. As the global professional environment unfolds, with the onset of the 2ast century, accountancy continues its trailblazing efforts. It is the first among the Philippine Professions to be included under the World Trade Organization's (WTO) policy ofAccounting and Its Environment | 1-27 liberalization of services, This means that Philippine accountants will be freely competing with in the global playing field against accountants from other parts of the world and will be able to hold their own. This is due, in no small measure, to the long and distinguished careers of the country’s accountants, to the linkages that local firms have forged with the world’s biggest accounting firms, and to the integrity with which the Board of Accountancy and the Professional Regulation Commission are now administering a profession that has acquired a global perspective. ACCOUNTANCY ACT OF 2004 Republic Act No. 9298, known as the Philippine Accountancy Act of 2004 was signed into law by President Gloria Macapagal-Arroyo on May 13, 2004. This law repealed Presidential Decree No. 692, the Revised Accountancy Law, which was enacted May 5, 1975. Some sections of the law are presented as follows: Scope of Practice (Sec. 4) ‘The practice of accountancy shall include, but not limited to, the following: Practice of Public Accountancy ~ shall constitute in a person, be it his/her individual capacity, or as a partner or as a staff member in an accounting or auditing firm, holding out himself/herself as one skilled in the knowledge, science and practice of accounting, and as a qualified person to render professional services as a certified public accountant (CPA); or offering or rendering, or both, to more than one client on a fee basis or otherwise, services such as: ‘= the audit or verification of financial transaction and accounting records; or = the preparation, signing, or certification for clients of reports of audit, balance sheet, and other financial, accounting and related schedules, exhibits, statements or reports which are to be used for publication or for credit purposes, or to be filed with a court or government agency, or to be used for any other purpose; or + the design, installation, and revision of accounting system; or ‘= the preparation of income tax returns when related to accounting procedures; or = when he/she represents clients before government agencies on tax and other matters related to accounting or renders professional assistance in matters relating to accounting procedures and the recording and presentation of financial facts or data. Pra -e in Commerce and Industry ~ shall constitute in a person involved in decision making requiring professional knowledge in the science of accounting, or when such employment or position requires that the holder thereof must be a certified public accountant. — shall constitute in a person in an educational institution which involve teaching of accounting, ‘auditing, management advisory services, finance, business law, taxation, and other technicallyIN Ballada 1-28 |_Basic Financial Accounting and Reporting 2022 Edition by Prof WI lippines may be allow related subjects: Provided, That members of the Integrated Bar of the Philip ed to teach business law and taxation subjects. Practice in Government ~ shall constitute in a person who holds, or is appointed to, 2 position in an accounting Brofessional group in government or in government-owned and/or controled corporation, Including those performing proprietary functions, where decision making requires professional knowledge in the science of accounting, or where a civil service eligibility as 2 certified public accountant is a prerequisite. n (Sec. 5) The Professional Regulatory Board of Accountancy and its Composi The Professional Regulatory Board of Accountancy, hereinafter referred to as the Board, under the supervision and administrative control of the Professional Regulation Commission, hereinafter referred to as the Commission, shall be composed of a chairman and six (6) members to be appointed by the President of the Philippines from a list of three (3) recommendees for each position and ranked by the Commission, from a list of five (5) nominees for each position submitted by the accredited national Professional organization of certified public accountants. The Board shall elect a vice- chairman from among its members for a term of one (1) year. The chairman shall preside in all meetings of the Board and in the event of a vacancy in the office of the chairman; the vice-chairman shall assume such duties and responsibilities until such time as a chairman is appointed. Qualifications of Members of the Professional Regulatory Board (Sec. 6) Amember of the Board shall, at the time of his/her appointment, possess the following qualifications: a. Must bea natural-born citizen and a resident of the Philippines. b. Must be a duly registered Certified Public Accountant with at least ten (10) years of work experience in any scope of practice of accountancy; © Must be of good moral character and must not have been convicted of crimes involving moral turpitude; and 4, Must not have any pecuniary interest, directly or indirectly, in any school, college, University or institution conferring an academic degree necessary for admission to the practice of accountancy or where review classes in preparation for the licensure examination are being offered or conducted, nor shall he/she be a member of the faculty or administration thereof at the time of his/her appointment to the Board. €. Must not be a Director or Officer of the Accredited National Professional Organization of Certified Public Accountants (APO) at the time of his appointment ‘The Certified Public Accountant Examinations (Sec. 13) All applicants for registration for the practice of accountancy shall be required to undergo a licensure examination to be given by the Board in such places and dates as‘Accounting and Its Environment | 1-29 os, the Commission may designate subject to compliance with the requirements prescribed by the Commission in accordance with Republic Act No. 8981. Qualifications of Applicants for Examinations (Sec. 14) Any person applying for examination shall establish the following requisites to the satisfaction of the Board that he/sh a. {sa Filipino citizen; b. is of good moral character; is a holder of the degree of Bachelor of Science in Accountancy conferred by a school, college, academy or institute duly recognized and/or accredited by the Commission on Higher Education (CHED) or other authorized government offices; and d. has not been convicted of any criminal offense involving moral turpitude. The following documents shall be submitted in support of the above requirements: a. Certificate of Live Birth in National Statistics Office (NSO) security paper; b. Marriage Contract in NSO security paper for married female applicants; c. College diploma with indication therein of date of graduation and Special Order Number unless it is not required; d. Baccalaureate Transcript of Records with indication therein of date of graduation and Special Order Number unless itis not required; e: National Bureau of Investigation (Nal) Clearance; f. Other documents that the Board of Accountancy may require Scope of Examination (Sec. 15) The licensure examination for certified public accountants shall cover, but are not limited to the following subjects: Theory of Accounts, Business Law and Taxation, Management Services, Auditing Theory, Auditing Problems, Practical Accounting Problems | and Practical Accounting Problems I ‘The Board, subject to the approval of the Commission, may revise or exclude any of the subjects and their syllabi, and add new ones as the need arises. Provided, That the change shall not be more often than every three years. The Board has revised the number of subjects being tested, and they are as follows: Financial Accounting and Reporting, Taxation, Regulatory Framework for Business Transactions, Advanced Financial Accounting and Reporting, Management Advisory Services, and Auditing. Rating in the Licensure Examination (Sec. 16) .ssed the licensure examination for accountants, a candidate .ge of seventy-five percent (75%), with no grades lower than Ibject. In the event a candidate obtains the rating To be qualified as having pa: must obtain a general averat sixty-five percent (65%) in any given sulwin Ballade 1-30 | asic Financial Accounting and Reporting 2022, altion by Prof. rity of subjects as provided for he subjects passed: Provided, of seventy-five percent (75%) and above in at least a majo 1g subjects within two (2) in this Act, he/she shall receive a conditional credit for That a candidate shall take an examination in the remainin 7 andidate fails t years from the preceding examination: Provided further, That Te ee or eae 1 (753) and a rating of at least obtain at least a general average of seventy-five percent sixty-five percent (65%) in each of the subjects reexamin as failed in the entire examination. Provided, That the Boa procedures on the implementation of this provision. ‘ed, he/she shall be considered rd may adopt its own internal Report of Ratings (Sec. 17) The Board shall submit to the Commission the ratings obtained by each candidate within ten (10) calendar days after the examination, unless extended for just cause, Upon the release of the resuits of the examination, the Commission shall send by mailing the rating received by each examinee at his/her given address using the mailing envelope submitted during the examination. Provided, That the report of rating may be distributed to the successful examinees during the mass oath taking as. New registered CPAs. Failing Candidates to Take Refresher Course (Sec. 18) - Any candidate who fails in two (2) complete Certified Public Accountant Board Examinations shall be disqualified from taking another set of examinations unless he/she submits evidence to the satisfaction of the Board that he/she enrolled in and completed at least twenty-four (24) units of subject given in the licensure examination Provided, That such refresher course shall be offered only by an educational institution granting a degree of Bachelor of Science in Accountancy. Provided further, That the candidates shall have the option of taking the aforesaid subjects in the regular course offering or in a special refresher course duly accredited by the Board. For purposes of this Act, the examination in which the candidate was conditioned together with the removal examination on the subject in which he/she failed shall be counted as one complete examination. PROFESSIONAL ORGANIZATION Article IV, Section 30, Republic Act No. 9298, The Philippine Accountancy Act of 2004, provides that “all registered CPAs whose names appear in the roster of CPAs shall be United and integrated through their membership in a one and only registered and accredited national professional organization of registered and licensed CPAs, which shall be registered with the Securities and Exchange Commission as a nonprofit corporation and recognized by the Board of Accountancy subject to the approval of the Professional Regulation Commission.” The Philippine Institute of Certified Public Accountants (PICPA) is the integrated national professional organization of CPAs in the Philippines accredited by the BOA and‘Accounting and Its Environment | 1-31 the PRC per PRC Certificate of Accreditation No. 1-APO-015 dated May 19, 2008. it was founded in 1929. PICPA is a registered non-stock corporation. The objectives of the Institute are as follows: + To protect and enhance the credibility of the CPA certificate in the service of the public, To maintain high standards in accounting education. To instill ideals of Professionalism, ethics and competence among accountants. To foster unity and harmony among members. PICPA adheres to the highest ideals of professionalism and commitment to service and upholds such values as: integrity, professional excellence, innovation, discipline, teamwork, social responsibility and commitment. Changes are inevitable because of the effects of the Republic Act No. 9298, the Accountancy Act of 2004 and its Implementing Rules and Regulations. The Amended By-Laws of PICPA (dated Nov. 26, 2005) provides that the PICPA organization shall be composed of four (4) geographical areas covering the entire Philippine archipelago divided into Luzon, Visayas, Mindanao and National Capital Region (Metro Manila), represented by nine (9) regions and four (4) sectors. The nine regions are Metro Manila, Northern Luzon, Central Luzon, Southern Tagalog, Bicol (author's note: this is a new region, per amendment), Eastern Visayas, Western Visayas, Northern Mindanao and Southern Mindanao, The sectors are Education/Academe, Public Practice, Commerce and Industry, and Government. PICPA is be governed by a National Board of Directors, composed of twenty-five (25) national directors, elected from the four (4) geographical areas representing the nine (9) regions and the four (4) sectors of the profession, The total of 25 national directors shall be comprised of: twenty-one (21) regional directors from the geographical areas and four (4) sectoral directors. The amended by-laws provided for a change from calendar year to fiscal year basis starting July 1, 2006. ACCOUNTING STANDARDS IN THE PHILIPPINES Accounting Standards Council On Nov. 18, 1981, the Philippine Institute of Certified Public Account: the Accounting Standards Council (ASC) to establish and imy that will be generally accepted in the Philippines. ants (PICPA) created prove accounting standards The creation of the Council received the support of the following: the Securities and Exchange Commission (SEC) and the Central Bank of the Philippines (CB)—regulatory agencies where the financial statements are filed; the Professional ° Regulation Commission (PRC) through the Board of Accountancy—which supervises CPAs and auditors; and the Financial Executives Institute of the Philippines (FINEX)—which is the12 Edition by Prof. WIN Balada 32. | Basic Financial Accounting ond Reporting 202: 0 ane reparatio} largest organization of financial executives who are responsible for per dani ee the financial statements. The ASC was composed of eight (8) pee Dae ana FINeY iu) PICPA including the designated Chairman; and one each from SEC, CB, The standards would generally be based on the following: existing practices in the Philippines; research or studies by the Council; locally or internationally available literature on the topic or subject; and statements, recommendations, studies or standards issued by other standard-setting bodies such as the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB). The statements and interpretations issued by the Council represented represent generally accepted accounting principles in the Philippines. Accounting principles become generally accepted if they have substantial authoritative support from the relevant parties interested in the financial statements—the preparers and users, auditors and regulatory agencies. Financial Reporting Standards Council Per Section 9(A) of the Rules and Regulations Implementing Republic Act No. 9298 otherwise known as the Philippine Accountancy Act of 2004, the Financial Reporting ‘Standards Council (FRSC) shall be the new accounting standard setting body. The FRSC shall be composed of fifteen (15) members with a Chairman, who had been or presently a senior accounting practitioner in any of the scope of accounting practice and fourteen (14) representatives from the following: one each from the BOA, SEC, BSP, BIR, COA and a major organization composed of preparers and users of financial statements; and two representatives each from the accredited national professional organization of CPAs in public practice, commerce and industry, education/academe and government. CORE COMPETENCIES FRAMEWORK FOR ACCOUNTANTS In recent years, there has been a growing clamor for professional bodies and the academe to bridge the gap between the requirements of the workplace and the academic preparation of our professionals. A competency-based approach to the preparation of professionals offers a systematic and effective way of bridging this gap. A competency-based approach to education is one where the competencies, and skill sets required of a newly admitted professional are identified through a formal process and are later validated by business and industry and subject matter experts, Such identified competencies (or learner outcomes) have predetermined performance measures for assessing skill acquisition. The government has undertaken efforts to improve the entry-level qualification requirements for the Filipino CPAs by releasing the well-defined set of competencies, Core Competency Framework for Entry to the Philippine Accountancy Profession. The‘Accounting and Its Environment | 1-33 professional values . e knowledge, skill, and core competencies for accountants identify th eee that new CPAs need to have in order to successfully face the chal changing environment and the future. The strategic goal is to produce technically competent and ethical professional accountants ready to compete internationally. Hence, the higher education structure (which includes the curriculum and course syllabi) should develop the following minimum core competencies: Knowledge ‘The CPA’s knowledge must cover: General Knowledge Of emphasis here are gaining an understanding of the different cultures in the world and developing an international perspective. It is generally believed that the traits that will make our Filipino CPAs prominent in the global marketplace are: ‘* competency in the English language (the lingua franca of business), ‘* adaptability to Western business practices, © level of trainability and ‘© good capabilities in dealing with foreign partners. Organizational and Business Knowledge In addition to the core knowledge in areas such as economics, quantitative methods and business statistics, organization behavior, marketing and operations management, the CPA must be conversant of international business and have an understanding of how the global business system works. He should also have an appreciation of the importance of ethics and corporate governance in business. The CPA must demonstrate competence in the followin, © administrative capability and efficiency © decision modeling risk analysis and management ‘© measurement ‘+ industry and sector perspective Information Technology (IT) Knowledge This includes not only being conversant with IT concepts for business systems but sound knowledge on internal control in computer-based systems, development standards and practices for business systems, management of the adoption, implementation and use of IT, evaluation of computer business systems, and managing the security of information.da Prof, WIN Balla 1-34 | Basic Financial Accounting and Reporting 2022 Edition by Accounting Knowledge it d areas and must include This includes core knowledge related to accounting and relates cost management proficiency in the international accounting and auditing see and business and and the latest concepts in management accounting, recent tax laws Sf SLE ne commercial laws. It also includes knowledge of corporate financ ‘and reporting. The capital markets, professional ethics and environmental accounting CPA should demonstrate competence in the following: * Basic Accounting and Preparation of Financial Statements, the Accounting Profession and International Accounting Standards ‘* Advanced Financial Accounting Practices ‘+ Advanced Financial Reporting Principles Management Accounting - Basic Concepts Management Accounting - Information for Planning, Decision-Making and Control ‘Taxation, Business and Commercial Laws Auditing - Fundamentals Auditing ~ Advanced Concepts Business Finance and Financial Management Skills The skills to be developed include: Intellectual This set of skills includes the ability to carry out abstract logical thinking and understand critical thinking. It also includes creative thinking or the generation of new ideas; visualization or “seeing things in the mind's eye”; and reasoning skills or the discovery of 2 tule or principle underlying the relationship between two or more objects and applying it when solving a problem. The CPA must demonstrate the following skills: © analysis © problem solving ‘ © strategic/critical thinking Interpersonal This involves developing the ability of CPAs to work in I includes the skils to participate as member of a team and contributing to group effort; teaching others new skills; working to satisfy clients’ expectations negotiation skills and working with diversity or working well witt th men and women from diverse backgrounds. The CPA must demonstrate attributes such as: Broups and being a team player. being a team player Persuasion, confidence and diplomacy discreetness, open mind and patience ‘capability for work and ability to respond well to pressure‘Accounting and Its Environment _| 1-35 Communication This refers to active listening skills and the ability to communicate effectively one’s points of view, both orally and in writing, at all organizational levels; being able to justify one’s position, deliver powerful presentations and to persuade and convince others. The CPA must demonstrate skills such as the ability to: ‘© verbally and/or in writing explain _financial/statistical/administrative matters/policies/procedures/regulatory matters/audit results at a level appropriate to the audience. * ask clear, concise and relevant questions to obtain desired information to perform task. © negotiate effectively. Values Values must concentrate on: Professional Ethics Since the objectives of the accountancy profession are to work in accordance with the highest standards of professionalism, to attain the higher level of performance and generally to meet the public interest, the need for CPAs to conform to the ethical standards of the profession become vital. These include integrity, objectivity and independence, professional competence and due care, confidentiality, and professional behavior. Moral Values Beyond ethical rules, there is a need for CPAs to be able to discern between what is morally right or wrong, ROLE OF ETHICS IN BUSINESS Definition Ethies is concerned with right and wrong and how conduct should be judged to be good or bad. It is about how we should live our lives and, in Particular, how we should behave towards other people. Its therefore relevant to all forms of human activity. Business ethics tells what is right or wrong in a business situation, while professional ethics tells the same thing regarding a profession. Ethical conflicts can arise, however, when what might be best for the company is wrong morally or professionally. Ethical Dilemma Ethical dilemma, by definition, is a situation in which there is no obvious ri ight or wrong decision but rather a right or right answer.Mado 1.36 | Basic Financial Accounting and Reporting 2022 Edition by Prof, WINES ‘as because its primary purpose is to make a profit. It is a constant search for potential advantage over others such that business persons are under pressure to do whatever yields such advantage. It is fundamenta, that business consciously apply ethical rules in its decision process to avoid potentially undesirable situations Business is a good source of ethical dilemm Ethics will probably prescribe that child labor is wrong. Yet in some countries, children are put to work at a young age, and often in poor working conditions. The children have no choice and from our point of view, they are basically being exploited. Suppose now that a company purchases well-made, inexpensive products from a foreign company that uses child labor in poor working conditions. The good quality and low price helps the company stay competitive. But is it right to purchase the products? This is an ethical dilemma. Suppose the foreign nation does not prohibit child labor, and the other country does not prohibit these imports. It may be legal, but is it right? The child-labor situation has other complexities. Let’s assume that the purchase is wrong because children are being exploited; but, on one hand, the families of these children need their income for food and shelter. Is it still wrong? Under the circumstances, perhaps buying those products provides a greater good. Sometimes professional or personal ethics may conflict with business ethics. From the business standpoint, staffs are paid to further their employer’s interests. But the staff also has professional and personal ethics to uphold. Here are some difficult sample situations © To remain competitive, 2 company decided to use cheaper lumber in the ladders it sells; although this may, in some instances, cause injury. ‘¢ A staff is asked to take part in a clandestine investigation of the personal life of an employee. ‘© Asuperior directs a subordinate not to hire a qualified individual because he is “not his (superior’s) type”. © Ahuman resource manager must lay off a staff who desperately needs the income and the staff is without any good alternative job option. ‘© Having privileged or insider information which can surely help the trusted staff earn a significant amount of money from the stock market. There are no easy answers to ethical dilemmas. When we are attempting to solve an ethical dilemma, we follow a process of ethical reasoning. We look at the information available to us and draw conclusions based on that information in relation to our own ethical standards. An individual must have a well-developed conscience and must do what the conscience tell is right. Individual factors, organizational relationships and opportunity interact to determine ethical decisions in business. In its simplest way, an ethical problem can be solved in three basic steps: analyze the consequences, analyze the actions, and make a decision :